Rates decision. As expected, the ECB left its three key interest rates unchanged today, leaving the Deposit Facility rate (DFR) at 3.75%, The Main Refinancing Operation rate (MRO) at 4.25% and the Marginal Lending Facility rate (MLF) at 4.50%.
Regarding forward guidance. The ECB is increasingly more confident that inflation is gradually converging to the target. In terms of wording, it does not really undermine the broadley assumed scenario of a rate cut by September at all. On the other hand, the “fluctuating” scenario for future data still makes it convenient to deter markets and economic players from getting carried away on an overdovish wave of sentiment
Macro assessment. i) the moderation of inflation is progressing at an acceptable pace but there are still pockets of stickiness that do not appear to have reversed. According to Lagarde, inflation data is expected to fluctuate around current levels for the remainder of the year; ii) on growth, a gradual increase in tracton is still the central scenario; iii) as for financial conditions, there is no major change in the overall outlook, as it remains restrictive but not overwhelmingly so.
Our view. i) No big surprises in today’s communication by the ECB; ii) the unchanged view about the almost certain September rate cut may have been reinforced by the nuance flagged by Lagarde in the sense that data dependency does not mean data-point dependency; iii) we buy the 25bp rate cut in the DFR in September, but we still struggle to fully agree 100% about the next 25bp cut being in December that the markets are still apparently expecting; iv) however, this sort of contrarian view may now look somewhat even more daunting in a scenario of accelerating dovishness in some other areas (the Fed) and thus it is unlikely that market dynamics will easily/soon bend to our view.